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Plan your wealth & retirement with Mutual Funds – WealthSamurai

Plan your wealth & retirement with Mutual Funds

 

 

mutual fund investments

A young techie sent me a message “I am 24 years old and I need help with my retirement planning . Can you help me out?”.

Amazing, isn’t it? Hardly around a decade ago it was impossible for people like us – early into the professional life to talk about retirement planning and personal finance. The scenario has changed completely. Now a days I see a lot of young professionals lined up seeking early retirement advice and discuss on the ways how they can accumulate wealth. Till a few years ago, these kind of questions were the subject of discussion for people in their late 40s and 50s

The reason behind this is the younger generation is much more aware about the surroundings. Youngsters are more worried about the retirement and investments. They indeed should be as

  • There is no provision of company funded pension schemes in private organizations and even in most of the Government organizations now.
  • It’s unlikely that the kids / family will help the current generation during their retirement times.  Hence they can not even think of relying on them during their golden years.
  • Due to advancement in medical facilities, people are living longer now. This means they have to provide for themselves for few more years.
  • The cost of living, including the healthcare costs are on the rise and one needs money to fund the living.

So how to get around and plan for a decent retirement for yourself? Rather I should frame this question as “How best mutual funds can be used to fund your retirement plan effectively?”

 

investment in mutual fund

A lot of historical data which is available at hand at many online portals / financial magazines indicates that the returns from a small amount invested religiously over many years in equity mutual funds have always beaten the inflation by a huge margin.

What does this mean? When you are investing for retirement you have to make sure that your earnings are not affected by inflation. Say for example, money in savings bank account as of today earns around 3% as interest per year. Retail inflation usually hovers at around 4%-6%. This effectively means that your money is eroding its value when you keep it in savings account.

When you are investing for a long term or a goal like retirement, you must ensure that you go full throttle to increase the gap between inflation and the returns you generate from your investments.

As per the historical data, over last 10 years

  • Large Cap mutual funds category has generated an average of around 14% returns per year
  • Diversified mutual funds category has generated  an average of  around 17% returns per year
  • Midcap / small cap mutual funds category has generated  an average of around 20% returns per year

So we do have some learning from the statistics above. To keep our earnings well above the inflation – we must tap the potential of Equity Mutual Funds. Right? It is extremely important to to earn well above inflation to save our money from eroding its value.

Now coming back to Mutual Funds, all one has to do is to select a mutual fund which fits in one’s risk taking appetite and set aside a sum every month to invest in it. Do it religiously for eternity – you will certainly hit the jackpot. If you are young, starting your career and love to take risks, pick a more aggressive small cap / mid cap combination. Choose the best funds in the category and you are done. Only catch is you have to invest in it month on month for many years. If you keep on investing and do not withdraw your earnings, you are set for your retirement corpus. One more things, invest a sizable amount. My suggestion is you must aim to invest 20%-30% of your take home income every month.

If you are conservative by nature, pick any top rated large cap equity mutual fund and hang on with it till you reach your retirement age.

 

benefits of mutual funds

Believe me, there are no shortcuts of becoming rich. One has to invest diligently over a long period of time and once you give exposure of time to your equity mutual funds investments none can stop you from acquiring a decent retirement corpus. You will be amazed to see the power of compounding.

One word of caution – do not get disturbed or distracted with short term fluctuation in markets. Every few years there will be sharp down turns which can be used to park more funds and earn better during the upcycles.

If you are young, ready to start – I am reachable at wealthsamurai at gmail.com to help you out.

More Reads:
Want to enter equity markets? Index based ETF funds are the safest bet
6 Sins people commit when computing retirement corpus

Happy Investing !!!

 

I am Too young to start with investments

I am Too young to start investing

“I have just started working last year. I am too young to invest.”
“I will invest once I have sufficient money. Right now my salary could barely survive by month end”
“Investments are for the later part of life. Let me enjoy now”
“I don’t want to invest my hard earned money now, I will do it later”

I get to hear above statements from a lot of youngsters who are fresh out of College, earning handsome income and are hell bent on spending all what they earn month on month.

too young to invest

Yes, but isn’t it true? Let me enjoy my earnings. I am a fresh pass out and I have a full 40 years of professional life ahead of me. I can take up investing later.

When you delay investments, you miss out on power of compounding

Albert Einstein is purported to have once remarked that the most powerful force in the universe is compound interest.

In simple terms, compounding is the financial equivalent of a snowball, rolling down the hill and gathering momentum as well as weight. More the ball rolls down, more weight it gathers in terms of the snow that get attached to it and more its momentum increases. By the time it reaches down the hill, it can well translate into a small avalanche. More the distance of travel, more is the impact of snowball.

Almost all personal finance websites/blogs and all financial magazines emphasize on power of compounding. If you start early, use compounding effectively, the end result could be a huge avalanche of money. The key is to start early and remain into the game.

Power of Compounding

 

I agree about the power of compounding. But I do not have spare money for investments. Many young professionals will not have any money left as the expenses are on the rise.

It is all about priorities. Since we know that most of the things in this world revolves around money, we have to give a certain level of priority to investments. “Pay yourself first” is the phrase widely used by financial planners across the globe. Instead of investing the money which is leftover after incurring all the expenses in a month, invest first and manage the expenses with the leftover money.

Once you make this a habit, you will become more responsible towards your finances.

And when you start young, you can amass wealth easily as you are giving time to your investments and supplementing your investment corpus by adding certain amount month on month.

I agree. But how to manage the expenses? Inflation is high and cost of living is rising rapidly month on month. If I invest my income then from where will I get money to pay utility bills and shop for groceries?

You don’t have to invest your entire monthly income. Take out say around 20% of your after tax income and invest every month. Manage your monthly expenses with the rest 80% of your  monthly income. Make use of the tools like Excel sheets for your benefit. Budget your expenses, cut down money leaks, increase your invest-able income and invest diligently.

Why you need insurance

Ok understood. Can you simplify this for me step by step?

There is no one sure shot formula for investments. But everything works on certain simple principles

  1. Start early – this will give you sufficient time to grow your money.
    Delaying investments? It can cost you DEARLY

  2. Budget your expenses.
    Making a simple budget to improve your personal finances
    A simple budget can save you from 5 big troubles

  3. Spend less than what you earn
  4. Invest your savings through proper diversification – consistently month on month
    Why I need diversification of investment?

  5. Cover yourself for any eventuality through health insurance and life insurance
    Why you need Insurance ?

  6. Have adequate emergency fund
    What is an emergency fund? And why you should have one?

  7. Don’t get into debt trap
    Consumer Debt & personal finance

  8. Don’t indulge in buying stuff
    Financial success : It’s not about the Stuff you gather

invest now
Bottom line is – it is your own money and you only have to take care of it.

Personal finance is not a rocket science but it requires your careful attention on money matters in your day to day life.

Happy Investing !!!

7 Things about personal finance that none tells you

7 Things about personal finance that none tells you

Everyone who is working knows a little bit here and there about personal finance. Most of us are aware of the fixed savings instruments, investment through insurance, provident fund, share markets. Though not in detail but at least we have heard or read about the names of these investment avenues through television channels, magazines, websites, newspapers etc.

 

personal finance

 

If you look at the definition of personal finance from YourDictionary, it says “Personal finance is defined as the management of money and financial decisions for a person or family including budgeting, investments, retirement planning and investments.”

 

I have started my journey towards personal finance around a decade ago. I have also made my share of mistakes during this journey. I sincerely feel if someone had informed me about certain key things in the beginning, I would have certainly not made some of the silly mistakes.

 

Based on my own personal experience, I am listing down few points which none will tell you about personal finance

  1. Building wealth will always take time:
    Building wealth takes time and persistent efforts unless you get some windfall or some inheritance. If you wish to be a millionaire, you have to plan it well and execute it well too. There are no shortcuts, and one needs to put in sustained efforts.

    Remember, there are no quick rich schemes on the way to wealth creation. My own experience so far says that the journey towards building wealth is fun if you learn to enjoy it.wealth creation in personal finance
  2. Early bird gets the worm:
    The sooner you start taking control of personal finance, you have better chance of wealth creation. We all know the concept of compounding. An early start towards personal finance can make compounding work in favor of you which in turn will help you in amassing wealth.

    Also when you start early, you have the time factor working in your favor. When you give time to your investments, they can grow comfortably and with lesser risk.
  3. Look ways to increase income if you want to save more and invest more:
    Passive income such as income from house, income generated through doing freelance jobs in your field of expertise and through freelance consulting adds up and go a long way in creating wealth quickly.

    Also, a better paying job increases your chance to save more, invest more and move quickly towards wealth creation.
  4. Budget and cut out the excess spending:
    This is one of the crucial step in wealth creation. If expenses are more than income, one will always be in negative month on month. With the help of a budget, once you start listing down your expenses, you will be surprised about the crap expenses taking place in your day to day life.

    I was surprised when I started listing my expenses sincerely. I must accept that budgeting has helped me a lot in freeing up the additional money for investments.

    Here is how you can start working with a simple budget
            
  5. Consumer loans are killer:
    Though they look cheap, consumer loans are big dampener in your wealth creation journey. The “easy monthly installment” syndrome forces one to buy more and more. The thirst to gather more and latest never ends because the loans are handy and CHEAP.

    Try avoiding consumer loans as they are a big hindrance in your journey to wealth creation.
    Read: Consumer loans & personal finance
           
  6. You can not build wealth with a salaried job:
    Yes, you read it right. Most of us somehow pull ourselves out of bed each day and go to job. Because job is the only source of income, you must go as there are bills to be paid for the upmarket home you bought last year or for the swanky new car you purchased. If you do not go to the job, how you will generate money to pay the cost of groceries, household expenses?

    With only one stream of income, it’s tough to build wealth. One must work on creating multiple sources of income. Be it some freelance work in your field of expertise or an additional income from an additional floor of your house. Multiple income sources work favorably when you are out creating wealth.
  7.  Learn the basics of investing and work on your investments:
    No matter how the term “investments” is terrifying to you as a layman, one must start learning the basics of investments. Remember, it is not a rocket science. Surely it will take some time to learn the “know how” but you must do it as it will help you in managing your own investments. You should know and work on your investments as it is your own money which is being invested. If you leave it on someone, they may not be honest in working with your money because of the conflict of interest.Financial agents, bank employees, investment advisers are most likely to recommend what works for them, not what works for you.

    READ:
    Start investing in Mutual Funds
    Goal based investing
    When to start investing in stock markets

your money matters in personal finance

 

Once you make these points a habit, you will reap the benefits in the time to come. If you can work around on certain pitfalls mentioned here, the journey towards wealth creation would be slightly more smooth and joyful.

 

Happy Investing !!!

Why you must Start investing in Equity markets through mutual funds

Why you must Start investing in Equity markets through mutual funds

Most of us are scared of the equity markets. We have some or the other excuse NOT to start investments in equity. For some, it’s risky, for some it’s too technical. Some feel that it’s too complex to understand and they are not qualified enough to understand the nitty gritties of the market ups and downs.

 

mutual fund investments

 

If you have never invested in mutual funds, you are at the right place. This post briefs you on how and why you should invest in mutual funds for various financial goals and milestones in your life.

Search for higher returns on investments make people to look out for investments in equity markets. Investment in equity markets bring “high risk” to the table. Everyone can not be an equity expert to understand the technicalities of the market swings, when to enter the market or when to exit the market. The loss of the principal amount is the biggest threat which keeps most of the investors away from the equity markets.

An equity Mutual Fund is the best tool for common investors to enter into equity markets. It helps them to reduce the risk, earn higher returns and since they are professionally managed, they play fair game.

By definition, “A mutual fund collects money from individual investors and invests the money on their behalf in the stock market, bonds, government securities etc. and it charges a small fees to manage the investment.”

 

investment in mutual fund

 

I am listing down 5 compelling reasons on why one should invest in mutual funds.

 

  1. Equity Mutual funds give higher returns :
    Ultimately every investor aims for a higher return on his/her investments. Equity mutual funds have given much higher returns in the past if you compare it with the fixed income instruments like fixed deposits / recurring deposits / bonds etc. Mutual funds have controlled exposure to the equity markets which in turn gives higher returns to the investors. If you see the returns from equity mutual funds over the last 15 years, most of the funds have given returns around 14%-15% compounded annually. This is much higher than the inflation figures

  2. Mutual funds are professionally managed:
    Mutual funds are professionally managed by qualified and trained fund managers usually picked up from top schools.  Fund manager’s daily job is to study, track the stock markets and tweak the fund’s composition accordingly. Also all the mutual funds in India are governed by SEBI which is a government agency which is governed by the government.

  3. Mutual funds can make you a disciplined investor:
    Mutual funds have amazing concepts of Systematic Investment Plan (SIP), Systematic Transfer Plan (STP) and Systematic Withdrawal plan (SWP). Armed with these plans, you need not have to bother about logging into your account every month and buy fuds, or switch funds. You can set up SIP, STP or SWP and sit peacefully while mutual funds work with your investments

  4. Mutual funds have greater liquidity:
    Unlike some investments like PPF, Government Bonds, mutual funds have an excellent liquidity. Except ELSS – Equity Linked Saving Scheme mutual funds (which have a lock in for 3 years), equity linked mutual funds can be sold and redeemed within 3 working days. Liquid mutual funds can be sold and redeemed in 1 working day. Thus one does not have to worry about liquidity related concerned when he is investing in mutual funds.

  5. Equity mutual funds are highly customizable:
    Equity mutual funds comes in various shapes and sizes. There are diversified funds, thematic funds, sector funds, large cap funds, small cap funds, mid cap funds, index funds, tax saving funds, arbitrage funds and so on. You can chose funds as per your choice and investment horizon. Mutual funds are not rigid like Government bonds or PPF scheme where you do not have right to alter the composition. Also the switch facility from one mutual fund to other givers it more flexibility.

  6. Mutual funds provide you ease of investment:
    Mutual funds are so convenient. No need to stand in long queues to invest your money or no need to do loads of paperwork to park your money. A simple online account can work for you. Usually one can approach their bank to open an online trading account through which mutual funds can be bought and sold by merely clicking mouse.

 

benefits of mutual funds

 

Looking at the historical data, there is no denial that equity mutual funds gives you much better bang for your money. The returns are much higher than the traditional investment avenues. If you want to get rid of earn-save-spend cycle, you have to look for professionally managed schemes which gives you higher returns.

Look no further, make a good portfolio of mutual funds to get better returns and invest money for your future retirement and goal based investment needs.

 

Happy Investing !!!

A high income does not guarantee a RICH YOU

A high income does not guarantee a RICH YOU

Almost everyone among us aim for a higher income. We all work very hard towards achieving the fat pay package which we always dream of. For most of us, it’s a straight equation – more the income – more the bonus and we can be rich throughout our life and can retire rich in peace with loads of money.

high income

 

 

Unfortunately with respect to finances, the equation is not so straightforward and simple. Had it been so straightforward, guys with high salaries would have become filthy rich and all of them would be happy by now.

More money, more income is sadly not the answer to financial woes of human beings.

Don’t get me wrong!

Here I am not denying the importance of the high income for an individual. A high income gives you a head-start in planning personal finances for you. It also gives you distinct advantages in the process of building wealth.

Here are the 5 indicators which points that you can not be rich even with the high income

  1. You are trying to keep up with joneses : This one is a major pitfall. While uncontrolled spending can leave anyone broke, keeping up with joneses will never allow any high income household to become financially responsible. whether  we are working in corporate jobs or living in a tony neighborhood, there is a lot of peer pressure which compels us to own latest cars, expensive homes, latest gadgets, to party every weekend etc. Easy credit availability by the banks also fuels this mentality and the advertising ensures that you feel outcast if you do not buy the latest gadget or the fastest car.financial peer pressure

    Do you often succumb to Financial Peer Pressure?  

  2.  You think investments are to be done only when you are nearing retirement : Many individuals are highly qualified in their respective streams. They did well in studies, mastered the art of their trade and earn a lot. Many are doctors, engineers, designers – earning high incomes. But they seldom pay attention to investments just because of ignorance. Their incomes are high, their expenses are high. Their monthly income is usually equal to their expenses. Since their expenses are met month on month, they do not think of investments. Also they do not feel the need of taking consultancy on the investments.

    When it comes to decision making about finances and investments, most of us like to postpone it to some other day. This stands true not only for decision making about investments but also for evaluating existing finances. Unknowingly, one ignores an important fact that there is a REAL cost which is associated with the delay in investments. Most of us tend to get away with this as there are no immediate visible effects of these delays. Nor we proactively calculate the potential damage it can cause.

    If you keep delaying, you need more amount as investment at a later stage to achieve desired funds. The early you realize this, better it is for you. You must know how to use the magic of compounding to your advantage.
    delaying your investments

    Delaying investments can cost you DEARLY 
     

  3. You keep accumulating depreciating assets : When you have a high income, it’s easy to reach your financial goals of life and retire rich with sufficient money. Unfortunately most of us start pouring money towards depreciating assets. We tend to spend money on the asset class which loses its value quickly. We fail to identify these money drains and our money keeps losing its value over time. 

    By the time we realize this, it’s usually too late and a lot of money had already gone into the drain.

    Latest cars, high end furniture, multiple vehicles, latest gadgets, luxury brand accessories are some of the items that comes under this category.
    Car is not asset

    Your Car is not your ASSET ! 
    Financial success : It’s not about the Stuff you gather
     

  4.  Your fixed expenses are very high: If you compliment high income with less expenses, the leftover is the investable surplus. This investable surplus can be systematically invested to build wealth.

    If the income is high and so the expenses, you will not be left with investable surplus. The lack of investable surplus will never let you accumulate wealth. The major expense month on month is the fixed set of expenses. Expenses like home loan / mortgage payments, monthly payments towards car and any other vehicle, utility payments etc.

    A bigger house translates into a higher monthly payment for mortgage, higher utility bills, higher maintenance cost, higher home association charges. Same stands for cars. A bigger car translates into a bigger monthly payment, a bigger insurance premium, a bigger maintenance cost, a bigger wear and tear costs.

    One need to identify fixed monthly costs and try to keep them at minimum. Buy the right house you need, do not overspend. Same stands true for your vehicle. 

    Overspending - hurdle in personal financeOverspending – the biggest block in financial freedom
    What are money leaks? How to find out your money leaks and plug them?)
     

  5.  You do not budget and you think that you are managing money well : Poor spending habits, uncontrolled expenses can be a disaster to your finances. They can even put you in a really bad situation financially.

    But if you are not budgeting and not tracking your expenses, it can also cause a big disaster to your finances. It can not only put financial stress on your retired life, but also your day to day finances can get affected badly.

    Tracking expenses becomes more important when your income is high. In case of high expenses, it’s good to track expenses and find money leaks. If you do not track expenses and budget, you can easily blow up your monthly income and will never come to know where all your money went. This will not leave you with any investable surplus to build wealth and achieve financial independence.

    So, take charge of your money. Do not count budgeting and writing expenses as a burden. If you start budgeting and writing expenses, you can avoid many common issues and problems related to money which you are facing in your day to day life.

    Simple Budget
    A simple budget can save you from 5 big troubles

    Here is how to make a simple budget? 


    Always remember

 

 

  • Money alone doesn’t bring happiness but it sure can help
  • You only have to take care of your money and ensure that it grows – none else will do it unless they have their own personal interest attached to it
  • Money can not solve all your problems. Yes but it can help you sail through most of your problems

 

Happy Investing !!!

 

7 Financial mistakes you will certainly regret when you turn 50

7 Financial mistakes you will certainly regret when you turn 50

 

financial mistakes

For a common man, investment just happen. Every working professional becomes an investor for sure at some point during his / her career. It could be

  • By buying tons of insurance policies just because your father also bought when he was young
  • By becoming elite member of a famous get rich quick Ponzi MLM scheme – where only elite and selected few are invited to join. You join this because one of your highflying and partygoing neighbor has selected you to be a part of high flying life.
  • Opening some fixed deposits and some recurring deposits as one of the senior coworker is doing the same.
  • By buying some land miles away from town, purely going by the words of the land developer that the piece will be worth 100 time after x years

Here we see that investment choices are highly influenced by external factors. This external factor could be our family member, coworker, media – digital / print / TV, so called experts or relationship managers from our bank etc.

A common man, influenced by external factors take financial investment decisions. I am going to discuss a few of the financial mistakes made by common man which he will regret once he turns 50. This common man could be YOU – reading this post.

financial-mitakes-2

These mistakes you will certainly regret when you turn 50

Delaying investments

When it comes to decision making about finances and investments, most of us like to postpone it to some other day. This stands true not only for decision making about investments but also for evaluating existing finances.

If you think that you will invest once you have sufficient money at a later date – You are WRONG. Believe me, the later date will never come in your life. The more you delay, more you will lose on the benefits of compounding.

 

Delaying investments? It can cost you DEARLY
The magical power of compounding

 

Not taking any risk with investments

For most of us, investing means opening up a fixed deposit or buying an insurance policy from some relative or a friend. While investing we never check for the real rate of returns or the cost of investment we are making. This ignorance results in the earnings which are far below the inflation rate and highly taxed. Though we do investment, but it results in a loss for us as the net gains usually are less when you figure out inflation and taxes in the earnings.

It is indeed surprising that even young working professionals resort to insurance and term deposits as an investment. When you have age in your favor, you must look to invest into equity through various channels.

Investments in equity will fetch far better returns over a long period compared to the money invested in term deposits and insurance. You can not create a sizeable retirement corpus without the help of equity exposure.

You do not have to be an equity expert to invest in equities.

Want to enter equity markets? Index based ETF funds are the safest bet 
When you should start investing in stocks?

 

Not diversifying the investment

Diversification of investment is a common practice where your investments are spread across different asset class such that your exposure to any one asset class is limited. In other words you are not dependent on only one asset class to give you returns. This saves you from extreme swings in your net-worth in case of any financial turmoil in the economy.

When you do not diversify, you are unable to take advantage of the better performing asset class. Broadly speaking there are asset class like stock market, Government bonds, bank deposit schemes, commodities, real estate. At any given point of time , certain asset class will be giving better results than the other – based on the market economics. When you diversify, you need not to keep looking at your investments constantly and can sit and relax in peace.

Imagine during a bull run if you place your entire money in stock market and suddenly one day the market crashes and by the time it settles down you are down by 30%-40% on your principal. So no diversification is a big threat to your hard earned money too.

Why I need diversification of investment?

 

Falling prey to dubious / MLM investment schemes

We must accept that we are greedy and our investments are also greed driven sometimes.

We have seen in the past – many ponzi schemes come and go. They do not make anyone rich but most of the investors are left with no money when the scheme suddenly disappears.

Speak Asia, questnet and many such schemes are example where people have invested huge sums and lost their entire investment in no time.

There is no fool proof quick rich scheme which exists. If someone promises this to you, it’s a big trap. This is also true for get rich quick MLM schemes. When you invest, do some logical postmortem of your investment instrument. And always be skeptical about get rich quick and MLM schemes.

 

Mixing investment with insurance

Life Insurance covers your life and safeguard your dependents. Health insurance helps you in emergency situation where in you have to undergo some expensive medical procedure. So the term “insurance” assures you that in case of any unexpected emergency – insurance company will take care of you or your dependents.

The moment you try to mix insurance with investment – you are headed for something which is not right for your portfolio. Insurance linked investments can cost you heavy in the short term as well as long run. The thumb rule is not to mix insurance with investment but still millions of policies are bought every year – just for sake of investments or for sake of taking last minute tax benefits. These policies not only gives below par returns but also force you to have long term lock in. you can not get out of them as the exit costs are very high.

Also by investing in insurance linked investments you are locking your precious capital which can be used to generate much better returns.

Why you need Insurance ?

 

Not taking adequate insurance

Why you need insurance?

You never know what is going to happen in near/distant future. If someone is the only earning member of a family and due to health reasons, he is unable to work, or due to sudden demise of the sole earning member, family goes in no earning mode.

  1. Who will pay the EMIs of home loan, vehicle loan?
  2. How the monthly household expenses would be taken care of?
  3. How to pay kid’s school fee & tuition expenses?
  4. How to pay expensive nursing care? Hospital expenses are skyrocketing these days.

Do not assume that you need to buy insurance policy just because your friend who is a salesman in insurance firm told you to do so. First identify purpose of buying insurance. Assess your requirements, do your research properly and make sure that you are adequately covered with insurance for Your life and your health.

 

money mistakes

 

 

Not having an emergency fund

In personal finance and money management, emergency fund is the first line of defense against the unexpected problems in life. Financial emergencies can happen anytime, and most of the time they occur without warning.

  1. What if your car needs immediate repair?
  2. What if you are out of job for a couple of months?
  3. What if you broke your leg while playing gully cricket?
  4. What if a sudden voltage surge damaged your TV/Fridge/AC and all devices?
  5. How you are going to tackle this?

One must have a sufficient emergency fund to tackle any emergency situation. This fund can be parked in any accessible liquid mutual fund which can give you good return and you can access it pretty quickly when the need arise.

What is an emergency fund? And why you should have one?

 

So instead of being sorry when you turn 50, TAKE CHARGE or your finances. Be active and start investments for your needs.

Happy Investing !!!

 

 

 

 

 

 

Want to enter equity markets? Index based ETF funds are the safest bet

Want to enter equity markets? Index funds are the safest bet

Most of us do not invest in equity markets because

  • We are afraid of stock markets as we do not know how they work
  • We think we do not have enough money for investments
  • We think that investment is something which is to be done when you are nearing retirement
  • We think we do not have basic education to invest money in stocks  

what are index funds

 

All have investments in mind but we love to delay it due to reasons best known to us. We all know that we have to accumulate enough retirement funds as we need regular income when there is no salary for us. Still we try to avoid investing money.

It has been historically proved that stock market gives the best returns on your investments. If one is looking to create a retirement corpus, stock market can not be ignored as the returns generated through them beat the inflation by a good margin.

If you do not know anything about equity markets, if you have never invested in equity markets / funds, still you have one option which is quite safe and which does not require you to be an equity market expert. It is INDEX based Exchange Traded Funds. Index funds have consistently outperformed markets and so called equity experts if you look at a longer duration. In fact one of the richest fellow in the world and a great investor Mr. Warren Buffet says “Consistently buy an S&P 500 low-cost index fund. I think it’s the thing that makes the most sense practically all of the time. Index funds make the best retirement sense ‘practically all the time’

 

warren buffet on index funds

 

So what are index Funds?

By definition, an index fund is a type of mutual fund with a portfolio constructed to match or track the components of a market index, such as the Standard & Poor’s 500 Index (S&P 500), BSE or NIFTY. An index mutual fund is said to provide broad market exposure, low operating expenses and low portfolio turnover

 

So what makes index funds safe as an investment instrument in equity markets?

  • Index fund is a way to avoid the risk that comes with picking of individual stock: Index fund spreads out your investment into the stocks which are top performing on any equity index. This way you are not buying individual stock, but a set of stocks which are like top performers of any equity market.
  • It helps you to buy not “the top company” but it lets you buy all top companies at a very low cost.

 

Costs matter a lot in the investment scenario. Most of the equity diversified funds charge a fund management cost of 2.5%-3.5% per year. In comparison to this, index funds usually have fund management cost of 0.5%-1% per year. So when you invest in index funds, you are already ahead of any equity diversified fund by 2%-3% and anyone who knows a little bit of arithmetic can say that over a period of 20 years this can make a huge difference in investment corpus.

 

Then why ETFs are not recommended by investment advisors / financial planners?

When you talk to an investment advisor, his or her salary is linked to the income they generate for the fund houses. More the fund management charge, more their salary. So it’s obvious that they would recommend top ranked funds which has more fund management charge than the plain vanilla index based ETFs.

There are no free lunches so anyone unless he has a personal interest can not give you honest advice regarding your investments.

 

about index funds


So what is the recommendation regarding index based ETF?

As pointed out by investment mogul Warren Buffet

  • Start buying index based Exchange Traded Funds (ETF)
  • Buy them every month through Systematic plan
  • Stay invested in them for a very long duration
  • You can bank on index based ETFs for your retirement plan
  • When markets are battered or down – do not panic, keep investing regularly. This will help you average your cost of investment.

 

If you stick to the points mentioned above, you do not have to worry about your retirement corpus.

So with index based ETFs:

  • You are saved from headache of actively managing stock portfolio
  • ETFs give you exposure to the gains of stock market over a long period.
  • You can plan your long term corpus goals for retirement / kids education with ease through index based ETFs
  • You can keep the cost of your investments low through ETFs.

 

Happy Investing !!!

7 Simple ways to control spending and start saving money

7 Simple ways to control spending and start saving money

Everyone among us wants to invest money. Whether you are a fresher out of college, someone who has just got married, new parents, someone in 40s heading towards retirement – each one of us want to save and invest for our future.

invest now

The biggest challenge for us is to find out money which we can invest. You may be a graduate from one of the ace universities earning a fat pay package or working as a senior manager with some MNC – but when you look at the savings and investments you have – less said is better. The common excuse is “I don’t have sufficient money to invest”

People, especially young people finds it difficult to save and invest in the initial years of their professional life. Discretionary expenses are quite high among the youth. In one single outing, huge expenses on food and lifestyle is common among youngsters. Gen Y is more focussed on EMIs instead of SIPs. They love to indulge in buying gadgets and newest cars but they don’t have money to save and invest. Most of the youth have same story to tell. They have lavish lifestyle but when asked about savings / investments, they always come up with a  sorry face.

Investments require a lot of disciplined approach and this discipline is the only mantra to make your investment strategy a successful one. Below is the list of 7 mantras that can make you control your spending and help you save money for investments.

Mantra #1
Save before you spend or Pay yourself first : The common approach towards investment is save whatever is left after all expenses. This way most of the people can not save as they don’t have any leftover money by the end of month. They spend their entire income month on month and are left with no surplus money for savings and investments. The best way to tackle this is set aside a sum – say 25% or 20% of your income and at the beginning of the month and invest it via SIP or recurring deposit so that it’s not within your easy reach. Learn to live on 80% of your salary. This will ensure that you are never short of money for investment.

Mantra #2
Avoid using credit cards and don’t save your credit card information on shopping sites :  It has been proved by many researchers that one tend to spend more if he uses credit card or the payment information is saved in online shopping websites. Always buy things with cash. Also when you go to shopping mall, don’t carry your credit / debit cards. Carry cash instead as you can understand the impact of your purchase when you see actual money going out of your pocket.  Remember – Overspending is the biggest block in financial freedom

Mantra #3
Wait before you buy something expensive: When you are fascinated by the new LED TV during the weekend outing at shopping mall – Don’t buy it immediately. Wait for 30 days. If the same urge is there after 30 days, buy the item in cash. Continue this practice with every expensive item you intend to purchase – be it TV, Car, refrigerator, AC etc


Mantra #4
Avoid peer pressure for spending: You don’t need to go out every evening for a coffee when all your team members go. Once in awhile it is fine but there is no need to have it everyday. Same way no need to go out for a drink to the exclusive (“expensive”) pubs every weekend to chill out with friends. It’s perfectly alright not to indulge in theses practices. Remember these practices are big money drain. We have seen earlier how not to succumb to peer pressure 

Mantra #5
Start investing in small amounts without any excuse: Whatever little money you have saved, start investing in Mutual funds/stocks/recurring deposits without making any fuss. If you keep thinking that you don’t have enough money for investments, things will never improve. You must start with whatever little you have and keep growing your portfolio gradually but steadily. Start goal based investing which can simplify your investment strategy. We have seen earlier – Do not delay investing as it can cost you dearly 

Mantra #6
STOP using window shopping as a de-stressing tool : Using window shopping as an excuse to de-stress can harm you in the long run. Buying / gathering stuff without any objective can drain your money like anything. It also puts you under undue stress as you keep looking for deals on anything and everything which you don’t need. Always advisable to make shopping need based with a list in hand when you go out to buy something. This will keep your life as well as home clutter free and free up a lot of investable surplus money. We have seen how supermarkets are a big trap earlier and how to avoid impulsive buying

 

stop spending

Mantra #7
BUDGET- BUDGET – BUDGET : There is no way around the exercise called BUDGET. Don’t buy any WANT items if it’s not budgeted for. Keeping track of expenses also keep your expenses in check as the figures will give you a real picture. When you start budgeting and writing your expenses, you will free up a lot of GHOST money which usually gets disappeared in your window shopping and unplanned entertainment. This link will help you on how to start budgeting 

If you stick to these practical 7 mantras, you will find yourself saving and investing regularly for your future. Remember, it’s your own money and none other than you can take care of it in a better way.

Happy Investing !!!  

Financial problems with an average family

Financial problems with an average family 

Most of us falls under an average family category. Average family usually comprise of husband & wife with one or two kids. In some cases husband and wife both are working and in some only husband is working hard to run the family and wife takes care of the kids and home.

 

average family

 

Everyone strive to be rich and wealthy whether it’s poor class or middle class. We all would like to enjoy the luxuries of life and we keep working to achieve the goal of becoming wealthy. But have we ever thought what keeps the poor class and middle class struggling to become rich? If everyone is working hard why an average middle class family remains a middle class family ? Why don’t they become rich say after 5 years of slogging ?

Let’s take a look at the financial problems with an average family which keeps it pulling back from realizing its dream of becoming wealthy.
average family

 

  • No financial planning: The single biggest problem for most people is that they just do not plan their finances. It just keeps coming and going. Even if they are not happy about the results they got so far, they do not change the way things are they do in their life.
  • Overspending: Many people with not very high incomes have very high ambitions. This is likely to get them to grief. In the stores too, gadgets and appliances are priced as EMI to lure people. It looks cool to have latest gadget and appliances hence people tend to stretch themselves and overspend. We have seen earlier how supermarkets are big traps?  
  • Not talking finance at home: Children are kept away from the finance topics at the dining table. Finance is perhaps the second most taboo topic at home! So many children grow up without knowing how much of sacrifice their parents have gone through to educate them. This makes children ignorant about finances and they repeat financial mistakes their parents made in the past.
  • Parents spending on education and marriage: There are just too many kids out there who believe that they need to worry about savings, investment and life insurance only when they cross 40 years. This means your father, father in-law or a bank loan has funded your education and marriage. Kids should take on financial responsibility at a much younger age than what is happening currently. Or rather parents should take lead and make their kids financially responsible.
  • Marriage between financially incompatible people: Most marriages under stress are actually under financial stress. Either the husband or the wife is from a rich background and the other partner cannot understand or cope with the spending pattern. Or the spending habits of partners are different. One is frugal and one is spendthrift causing severe financial imbalance in the family.
  • Delaying saving for retirement: “I am only 27 years old why should I think of retirement “ seems to be a very valid refrain for many working professionals! Every year that you delay in investing the greater the amount that you will have to save later in your life. Till the age of 35 it might be feasible for you to catch up, but after some time the amount that you need to save for retirement just flies away. We have seen earlier that delaying investments can cost you dearly. 
  • Inadequate life and medical insurance: With all the risks of lifestyles, travel, etc. illness and premature death are common. We buy vehicle insurance because it is forced upon us, but we ignore life insurance! Imagine insuring a INR10 lakh car, but not insuring (or under insuring) the person who is using the car — and paying for it, that is, you! We have seen earlier that Why we need insurance?  
  • Not prepared for medical emergencies: Normally big emergencies — financially speaking are medical emergencies. Being unprepared for them — by not having an emergency fund is quite common. Emergency fund has now come to mean the credit card.This is good news for the bank, not for the borrower. We have seen earlier that what is an emergency fund and why we need it?  
  • Lack of asset allocation: Risk is not a new concept. However, it is a difficult concept to understand. For example when the Sensex was 10k there was much less risk in the equity markets than there is today. However at 10k index people were afraid of the market. Now everybody and his aunt wants to be in the equity market — and there are enough advisors who keep saying, “Equity returns are superior to debt returns.” This is true with a rider — in the long run. It is convenient for the relationship manager to forget the rider. So there could be a much larger allocation to equity at higher prices — to make for the time missed out earlier. We have seen earlier that goal based investing is a good approach to have proper asset allocation. 
  • Falling prey to financial pitches: The quality of pitches has improved! Aggressive young kids are recruited by brokerage houses, banks, mutual funds, life insurance companies, etc. and all these kids are selling mutual funds, life insurance, portfolio management schemes, structured products, et al. Selling to their kith and kin helps these kids keep their jobs, and there is happiness all around! These kids, themselves prey to financial pitches, have now made it an art when they are selling to their own natural “circle of friends and relatives.”
  • Buying financial products from obligated persons. This is perhaps one of the worst things you can do in your financial life. A friend, relative, neighbor, colleague who has been doing something else suddenly becomes a financial guru because they have become an agent! Charity begins at home, not financial planning.
  • Financial illiteracy: Most people do not wish to know or learn about financial products. They simply ask, ”Where do I have to sign” — so buying a mutual fund is easier than buying life insurance! Selecting products based on the ease and simplicity of buying is a shocking but true real life experience in the financial behaviour of the rational human being!
  • Ignoring small numbers for too long: What difference will it make if I save INR5,000 a month? Well over a long period it could make you a millionaire! So start early and invest wisely. It will make you rich. That is the power of compounding. We have seen earlier the magical power of compounding
  • Urgent vs important: Most expenses, which look urgent, are perhaps not so important — the shirt or shoe at a sale. That luxury item which was being offered at 30 per cent discount is such an example. These small leakages are all reducing the amount of money you will have for the bigger things like education or retirement. We have seen earlier that how to tackle money leaks.

 

financial problems

The list can be long but the points mentioned above can well be attributed as hindrances that are responsible for middle class not becoming rich. So if you want to become wealthy, tackle these issues in your life one by one. I am sure you will be able to cross the fence sooner after tackling the above mentioned issues.

 

Happy investing !!!

 

Seven Baby steps towards financial freedom

Seven Baby steps towards financial freedom

Do you know how marathon runners are trained?

If someone thinks he should run a marathon, and goes for the run very next morning what will happen? It will be a disaster for him. Right?

baby steps to financial freedom

 

A marathon runner must start small initially with 1 kilometer, 2 kilometers run and so on. He has to gradually attain the 42 kilometers mark. He has to gradually build stamina, develop endurance, have many practice sessions before he hits any competitive race.

All this happens over a period of time. This can not happen overnight. Hope you all agree with me on this. A runner has to set small milestones first like a 5 kilometer run, 10 kilometer run, a 25 kilometer run and so on. Once all small milestones are reached, a runner can confidently go for a full length 42 kilometer marathon.

Same is with financial planning. If you are at ZERO level or you have just started journey towards setting finances in order, thinking about financial freedom will look impossible to you. Journey towards financial freedom is a long journey. You have to create numerous milestones which will make the journey also interesting and you will always be motivated throughout the journey. Achieving these small milestones will also give you a sense of accomplishment in the course of the journey. Not to forget, these milestones will also keep you away from backtracking.

Below are some important milestones you can create in order to stay focused and not to lose interest while journeying towards financial freedom. The order is important as you can not run a full marathon without conditioning yourself for a half marathon. Isn’t it?

 

climb to financial success


Step 1
Start making a budget. Write down all expenses month on month. It is important. It will help you in knowing your spending  pattern.This will also give you an idea about your investable surplus – the money which you can utilize for investments moving forward. (How to make a simple budget)

Step 2
Save about 6 months of expenses in cash or liquid funds. This amount should be easily accessible to you. This is your emergency fund. This is meant only for emergencies like some medical attention or in case you lose your job. This will keep you afloat when you do not have any income to take care of expenses and will help you in not falling in debt trap during any personal emergency.

Step 3
Gradually but steadily pay off all your consumer debt. Consumer debt is considered as a bad debt for an individual. Debt for TV, appliances, vehicles, furniture etc falls under consumer debt. One these debts are tackled, you free up a large monthly investable surplus.

Step 4
Start saving for retirement. Most of us will not receive any pension or annuity. Keep somewhere around 25%-30% of your monthly salary as your investment for retirement. Make a good balanced folio and start investing. Your folio can be a combo of Debt, mutual funds, PPF etc.

Step 5
Start investing for your kid’s education. You can dedicate an equity linked mutual fund for this. Also you can open a PPF account when your kid is born and maximize investment into it every year. A combo of PPF and an equity linked mutual funds can do wonders for your kid’s future.

Step 6
Pay off your mortgage/home loan. This will remove a big burden from your head. It is good to feel debt free. But this is little tough as usually the amount is quite high. But I strongly recommend you to do this as paying off mortgage will free up a huge chunk of money for you as an investable surplus.

Step 7
Keep re-adjusting your portfolio once in a couple of years and enjoy life. Keep reading, pursue your hobby, keep traveling but remember that your money has to outlive you.

These are small steps. You can start any time, at any age. Important is you make a START.

Happy investing !!!